This is how closing your credit card can adversely impact your credit score

Do you carry an old credit card that you no longer need any more? There could be several reasons for not using it. But it does not mean that you would never need the card in future. For instance, you may have applied for a card a couple of years ago to seek hefty discounts on travel and hotel bookings. But since you do not travel frequently anymore, the card does not have much usage any longer.

What should you do in such a case? Get your credit card cancelled? Well, be aware that cancelling your credit card leads to a drop in your credit limit, which negatively impacts your credit score.

Drop in credit score

Let us understand this with an example. Suppose you have three cards with a total credit limit of ₹15 lakh. Now, if you use the credit limit of ₹3 lakh in any given month, you are effectively using 20% of the total credit limit on a rolling basis. And if you get one card (with a limit of ₹5 lakh) cancelled, you will be left with a ₹10 lakh limit. Now, your credit utilisation ratio (CUR) (upon using ₹3 lakh) would spike from 20% to 30%. As a result, it would be reflected in your credit score.

Those who are not aware, CUR is the ratio of credit utilised divided by the total credit limit. This gets revised immediately when you opt for the cancellation of your credit card.

However, you could still consider cancelling your card when one of the following takes place:

I. Far more than required: When your credit limit is far more than you require. If you never use more than 5-10% of your credit limit, you could consider this as a viable option.

II. Difficult to manage: If you already have 5-6 cards and you find it too difficult to manage all these accounts. Then you could consider getting the limit raised on one of these credit cards instead of maintaining so many accounts.

III. Premium card: You have got a new premium card with an exceptionally high credit limit, thus minimising the need to keep one of your existing card (s). This is a very extraordinary situation, and it varies from case to case.

Disclaimer: MintMoney has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.